The decision in Re Marsella [2019] VSC 65 (‘Re Marsella’)
highlights the importance of trustees of self managed superannuation
funds (‘SMSFs’) exercising their discretion to pay death benefits in
good faith, with real and genuine consideration and in accordance with
the purpose for which their power was conferred.

This case is a
wonderful read and has a great depth of legal analysis of the high legal
standards that SMSF trustees are held accountable to. This case also
highlights the need for careful attention to SMSF succession planning.

Facts

The
Swanston Superannuation Fund (‘Fund’) was established by deed on 12 May
2003 (‘Deed’) with Helen Marsella (‘Deceased’) and her daughter from
her previous marriage, Caroline Wareham (‘Caroline’) as individual
trustees. The Deceased was the sole member and founder of the Fund until
her death on 27 April 2016 and her Fund balance was then an estimated
$450,416.

The Deceased was also survived by her husband of 32 years, Riccardo Marsella (‘Riccardo’).

Clause
8.5 of the Fund’s Deed provided the founder with the power to appoint
and remove any person as an individual trustee, conditional on the
approval of a members’ resolution. This clause also provided that an
individual ceases to hold the office of trustee upon death.

The dispute

In
response to the exercise of discretion and payment of death benefits in
favour of Caroline, Riccardo, both in his personal capacity and as
executor of the Deceased’s estate, sought the removal of Caroline and
her husband Martin Wareham (‘Martin’) as trustees. As discussed later,
Riccardo was successful in this regard. Additionally, Riccardo sought
the appointment of a new trustee and the repayment of the death benefit
plus interest to the Fund.

Riccardo submitted that the trustees
did not exercise good faith and real and genuine consideration in
relation to the dependants of the Deceased and submitted that the death
benefit payment should be set aside.

The trustees submitted that
the Deed afforded them with an absolute and unfettered discretion to
make the payment to Caroline, arguing that they were not required to
provide reasons for their decision. Further, the trustees submitted that
under the Deed, the trustees had a general power of appointment, which
was tantamount to ownership, and for that reason, Caroline could
distribute the entire Fund balance to herself.

Questions for the Court

The key questions for the Court were:

whether
Caroline and Martin properly exercised their discretion when paying the
Deceased’s death benefit. Specifically, the Court considered whether
the trustees acted in good faith, with real and genuine consideration
and in accordance with the purposes for which the power was conferred;
and

whether Caroline and Martin should be removed as trustees and the appointment of a new trustee.

Outcome

McMillan
J held that Caroline and Martin in their capacity as trustees failed to
exercise their discretion with a real and genuine consideration of the
interests of the Fund’s beneficiaries.

In particular, the Court
singled out Caroline’s behaviour for criticism, stating at [56] that her
arbitrary distribution of benefits in the Fund to herself was carried
out with ‘…ignorance of, or insolence toward, her duties.’ McMillan J at
[57] also stated that her conduct was beyond ‘mere carelessness’ or
‘honest blundering’. Consequently, McMillan J held that Caroline and
Martin were to be removed as trustees commenting at [79]:

In
the context of an improper exercise of discretion, and significant
personal acrimony between the first defendant and plaintiff, the
defendants are to be removed as trustees of the fund.

Subsequently,
McMillan J held that Riccardo was to file further submissions for the
appointment of a trustee to ensure the Fund meets the definition of a
complying superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth).

Key lessons

Many implications arise from the decision of Re Marsella.

Lesson 1 — Trustees must exercise their discretion with good faith, etc

This
case highlights the importance of good faith, etc, in regard to the
exercise of a trustee’s discretion in relation to paying death benefits.

In
April 2017, the Fund’s accountant Mr Hayes received two sets of trustee
minutes of meetings and resolutions, both dated 17 April 2017 prepared
by the trustees’ lawyers.

The court closely examined the documents and communications prepared by the trustees’ lawyers.

These
communications counted against Caroline on the question of good faith,
as the court found that correspondence provided to Riccardo via her
lawyers evidenced a ‘dismissive tenor’ and was approached with
‘…misapprehensions as to the terms of the fund deed…’

The first
set of trustee minutes dated 17 April 2017 named Caroline as the sole
surviving trustee and resolved that the trustee exercise its discretion
to pay her the entire balance in the Fund. These minutes also indicated
that due consideration had been afforded to the interests of all of the
dependants and to any beneficiaries of the Deceased including her legal
personal representative (ie, the executor of her estate).

Interestingly,
a second set of trustee minutes was also made on 17 April 2017 noting
that clause 8.1 of the Deed required the office of trustee be held by
two or more individual trustees and noted that the appointment power
could not be exercised as the Fund had no members and accordingly, a
member resolution could not be made to appoint another trustee. The
second minutes indicated that Caroline could however appoint a
co-trustee by reliance on s 41(1)(b) of the Trustee Act 1958
(Vic) (which broadly applies if there is otherwise no other person
willing or able to act as trustee). Relying on s 41(1)(b), Caroline
appointed Martin as co-trustee to satisfy the requirement in the Deed to
have a minimum number of at least two trustees.

Moreover, the
second set of minutes also provided that together, Caroline and Martin
resolved to distribute all of the Deceased’s balance in the Fund to
Caroline. These minutes also used similar language to the first set of
minutes indicating that due consideration had been given prior to the
resolution to pay the whole of Fund’s balance to Caroline.

The
court was suspicious that there were two sets of trustee minutes on the
same day (both dated 17 April 2017) and especially that Martin had only
been appointed on that same day as a co-trustee resolved to approve the
payment to Caroline.

McMillan J noted Karger v Paul
[1984] VR 161 at [164], holding that the discretion must be exercised in
‘good faith, upon real and genuine consideration and in accordance with
the purposes for which the discretion was conferred’. Generally the
Courts will not look at the outcome itself, but where the result is, in
the words of McMillan J at [51] ‘grotesquely unreasonable’, this may
form evidence that the discretion was not properly exercised or was mala
fides.

‘[w]here
a trustee exercises a discretion, it may be impugned on a number of
different bases such as that it was exercised in bad faith, arbitrarily,
capriciously, wantonly, irresponsibly, mischievously or irrelevantly to
any sensible expectation of the settlor, or without giving a real or
genuine consideration to the exercise of the discretion. The exercise of
a discretion by trustees cannot of course be impugned upon the basis
that their decision was unfair or unreasonable or unwise. Where a
discretion is expressed to be absolute it may be that bad faith needs to
be shown.’

Accordingly, McMillan J held that the question of
whether a trustee acted in good faith, with a real and genuine
consideration will turn upon the considerations and inquiries the
trustee made, their reasons for, and manner of exercising their
discretion.

Indeed, all trustees must inform themselves before
making a decision to ensure the discretion is exercised with a real and
genuine consideration for the purpose for which the discretion was
conferred. As a corollary of this principle, trustee must not take
irrelevant considerations into account and must not fail to take
relevant considerations into account. In this case, the court noted at
[52] that Caroline’s purported good faith was impugned by her ‘…ignoring
the plaintiff’s substantial relationship with the deceased and
relatively limited financial circumstances…’ which were relevant
considerations.

Accordingly, advisers must remember that although a
trust deed may, among other things, afford a trustee with absolute
discretion, the discretion must still be exercised in good faith and
with due regard to relevant considerations.

Lesson 2 — Trustees must exercise their powers in accordance with the purpose for which the power was conferred

Trustees
must also carefully exercise trust powers in accordance with the
purpose for which these powers were conferred. This is a question of
fact that is decided having regard to the overall circumstances and
evidence, as McMillan J held at [40]:

Whether a
trustee exercised a power for a proper purpose is a question of fact to
be decided on the evidence. A trustee is not bound to disclose her or
his reasons in reaching a particular decision, and a negative inference
cannot be drawn from the non-disclosure by a trustee of the reasons for
his or her decision.

In this case, McMillan J held that additional
evidence would be required to demonstrate that Caroline and Martin had
exercised their discretionary power for an improper purpose, as Caroline
fell within a designated class of beneficiaries that are the subject of
the power under the terms of the Deed.

Lesson 3 — Trustees must not act in conflict of their duty

This
case considers a number of issues relating to conflict, particularly
where personal conflicts and relationship breakdowns arise that preclude
trustees from exercising their duties impartially and as part of the
proper administration of the trust. The court found that significant
personal acrimony existed between Caroline and Riccardo that impacted
her ability to discharge her duties as trustee and that the Deceased did
not foresee and consent to such a conflict merely by virtue of
appointing Caroline as a co-trustee at the inception of the Fund.

In
this case, the trustees’ lawyers sought to deny that a conflict had
arisen, however McMillan J rather characterised this downplaying of the
conflict as ‘ignorance or deliberate mischaracterisation of the true
circumstances at hand’ at [50], holding that a substantial conflict did,
in fact, exist between Caroline and Riccardo.

Moreover, McMillan J
held that the overarching obligations of trustees applied to the
exercise of discretion in relation to death benefits. Relevantly,
McMillan J held at [47]:

The fact that
[Caroline] falls within the class of objects did not negate her duty to
exercise the power in good faith, upon real and genuine consideration,
and for the purposes for which the power was conferred.

This
aspect of the case is significant as it illustrates how easily conflicts
can arise in an SMSF context. ATO data indicates that approximately 70%
of funds are two member funds, and these are likely to predominantly
involve married couples and upon the death of the first spouse, it is
very likely that the surviving spouse may be placed in a position of
potential conflict in relation to their trustee role. If these
foreseeable conflicts are not appropriately managed, many SMSFs that
become managed by the surviving spouse following the death of their
spouse could stray into breaching their fiduciary duties.

Lesson 4 — Importance of seeking advice

This decision demonstrates the importance of seeking independent, specialist legal advice where there is any uncertainty.

McMillan J noted in Re Marsella
that the Fund failed to obtain specialist legal advice, even though
this was recommended by the Fund’s accountant and notwithstanding that
the trustees had obtained certain legal advice. McMillan J specifically
noted at [55] that Caroline ‘did not seek to resolve uncertainty
surrounding the fund deed, in the context of a significant financial
decision…’ and that specialist legal advice was particularly important
given the complexities and size of the Fund.

Accordingly, where
there is any doubt whatsoever regarding a fund’s document trail or
related matters, including how a trustee should exercise its discretion,
these critical points must be addressed before a trustee is in a
position to properly exercise its discretion. Therefore, advisers and
SMSF trustees should seek independent specialist legal advice as soon as
possible to properly address these matters.

(Naturally, DBA
Lawyers, as well as being recognised as the leading SMSF law firm in
Australia, offers independent expert legal advice. Our advice is also
subject to legal professional privilege.)

Lesson 5 — Planning for control after death

This
case highlights the importance of sound succession planning. Indeed,
the succession to control of an SMSF is critical to ensure a fund is
properly managed on the loss of capacity or death of a member. Unless
the fund is placed in trusted hands, particularly where there are second
or subsequent spouses, the member’s wishes and intentions may be
ignored. There have been numerous death benefit disputes involving SMSFs
where the second spouse has taken control of the SMSF for their own
benefit on the death of their spouse. In contrast, this case involved
the surviving trustee, being the Deceased’s daughter, seeking to take
control of the fund to the detriment of the second spouse.

We note
that with appropriate succession planning and quality documentation
(including, among other things, a BDBN or death payment deed) may have
overcome the issues in this case.

DBA Lawyers believes there are
very few SMSF deeds that appropriately and adequately deal with
succession and what happens on loss of capacity or death. Indeed, if an
SMSF deed is not appropriate the trustee should urgently consider
updating to a quality deed.

Conclusions

There are limited
grounds to review a trustee’s exercise of discretion and the courts are
reluctant to interfere with the exercise of discretionary powers unless
there is clear evidence. This case demonstrates that the courts are
willing to set aside trustee decisions and remove trustees where they
have failed to act in good faith and fail to comply with their trustee
duties.

In light of this decision, SMSF trustees should consider
reviewing their current SMSF succession planning to ensure there are
appropriate arrangements and documents in place and seek expert legal
advice wherever needed.

* * *

This
article is for general information only and should not be relied upon
without first seeking advice from an appropriately qualified
professional.

Tuesday, March 5, 2019

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